Canadian Agriculture Output Surges in 2012-BMO Economics

- High dollar still a challenge, but opportunities lie in emerging markets, improved productivity and a shift to higher-return products

TORONTO, ONTARIO--(Marketwire - Oct. 11, 2012) - Real agricultural output has been on the upswing in Canada and is on track to increase 7.5 per cent this year, giving producers a strong financial position heading into 2013, according to the latest overview of Canadian agriculture from BMO Economics.

"Output has now increased in each of the past 15 months," said Aaron Goertzen, Economist, BMO Capital Markets. "Crop production, which accounts for more than three quarters of the sector's output, drove the increase after lower output prices and poor growing conditions hindered production over the previous several years. Meanwhile, livestock production has held up relatively well despite large swings in commodity prices."

"Canadian agricultural producers have seen an impressive rebound in 2012," said David Rinneard, National Manager, Agriculture, BMO Bank of Montreal. "While challenges remain, continued demand and favourable prices, together with a return to better growing conditions, have been a clear boon to the industry. As always, we will work with our customers to support their growth and continued success in the months and years ahead."

The BMO report outlines key opportunities for the Canadian agricultural sector:

With quickly expanding populations and incomes, emerging markets also represent a key growth opportunity for Canadian agriculture.

With an eye to export competitiveness, the agriculture sector has been undergoing fast-paced technological and organizational change, which has resulted in rapid productivity growth.

Producers continue to shift production toward higher-return products, and there has been considerable diversification toward crops other than wheat over the past two decades. Demand for products with particular health and environmental characteristics continues to grow in developed economies.

Mr. Goertzen noted that, with production rising, agricultural producers continue to benefit from elevated prices for their output. "The price of most crop commodities remains high, after the onset of drought in the United States drove corn and soybean prices to records in July and August. Although growers in Southern and Eastern Ontario were also affected by dry growing conditions, overall conditions in Canada held up well relative to the United States, where 80 per cent of agricultural land was affected by drought."

However, while drought-tightened supply in corn and soybean markets will support top-line growth for some Canadian suppliers, it is also translating into higher feed costs for livestock producers. "Livestock prices retreated from high levels over the summer as producers reduced the size of their herds in the face of elevated feed costs, temporarily increasing supply to the market," said Mr. Goertzen.

On the trade front, exports have been in decline this year. "The decline has reflected lower export volumes, particularly to the European Union, which have more than offset favourable price conditions," stated Mr. Goertzen. With production rising, farm inventories could accumulate before exports rebound or producers have time to adjust. Meanwhile, agri-food imports have continued to edge upward primarily on higher volumes, reflecting the improved purchasing power associated with a strong Canadian dollar. These developments have combined to significantly narrow Canada's agri-food trade surplus."

From a financial standpoint, agricultural producers remain in solid condition. "Gross farm receipts have picked up over the past year in line with expanding production and rising prices, and industry debt remains low relative to equity," said Mr. Goertzen. "Borrowing has also become less expensive, and only 4 per cent of industry revenue is required to service debt. On the other side of the balance sheet, agricultural assets continue to grow in value, and buyers for assets like farmland should be readily available in an industry where consolidation remains a key feature."

Looking ahead, the strong Canadian dollar remains an important challenge. "Since the Canadian dollar began its ascent in 2002, the volume of agri-food imports has soared 64 per cent, while export volumes have increased a meager 14 per cent," noted Mr. Goertzen. "Moreover, agricultural exporters are facing increasingly stiff competition from players in emerging market countries like China and Brazil, which compounds the challenge of a high-loonie environment."

Established in 1817 as Bank of Montreal, BMO Financial Group is a highly diversified North American financial services organization. With total assets of $542 billion as at July 31, 2012, and more than 46,000 employees, BMO Financial Group provides a broad range of retail banking, wealth management and investment banking products and solutions.